3 Reasons Telefonica (TEF) Is Buying A Controlling Stake In Italy's Telco

Telefonica SA (NYSE:TEF) and its partners in Italy struck a deal allowing the Spanish telecom giant to take a majority stake in Telco, the largest shareholder of Telecom Italia SpA (NYSE:TI).

The 324 million euro, or $438 million, deal, announced on Tuesday morning, will allow Telefonica to buy the rest of the company by the end of next year. Telefonica will buy new nonvoting shares in Telco that will lift its stake from 46 percent to 66 percent.

And by 2014, Telefonica will have the right to convert all of its Telco stock into voting shares.

Here’s why the deal matters:

1. Telefonica Wants Control Over Rival Telecom Italia

Telco owns a 22.4 percent stake in Telecom Italia, which competes with Telefonica in Brazil’s mobile phone market. Telefonica could face antitrust challenges in Brazil. The Spanish company might find some opposition in the ranks of the Italian government, which wants Telecom Italia to remain under Italian control.

2. Major U.S. Telecom Firms – And An Egyptian -- Are Booted Out

AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) were floated as potential buyers for the Telco stake as the Brazilian mobile market looks ever more appetizing. They weren’t the first to seem interested. Last November, Egyptian tycoon Naguib Sawiris offered a proposal to invest in the debt-laden Italian company through a capital increase.

3. Telecom Italia Desperately Needs The Cash

Telefonica’s cash deal to buy its new stake in Telco will inject some much-needed capital into Telecom Italia. The company risked a downgrade to junk-bond status last month, according to data compiled by Bloomberg. Moody’s, Fitch Ratings and Standard & Poor’s had already cut its rating to a level just above junk status earlier in August.